
Real estate in divorce: What happens to ongoing financing?
The financing bank reduces the risk of loan default if two spouses sign instead of just one. In this case, both spouses are jointly and severally liable to the bank. This means that one partner is not liable for half of the current loan and the other for the other half. Instead, the bank can claim the entire loan amount from either spouse.
If the property is sold before the end of the fixed interest period in the course of a divorce, the bank charges a fee for this termination of the contract in the form of an early repayment penalty. This amount is based on the loan amount, the term, and the conditions such as the interest rate. Since 2009, Germany has been experiencing a period of low interest rates, which is why many home builders have taken out long-term loans with terms of 15, 20, or even 25 years. This means that there is a high probability that the loan agreement will be terminated and early repayment compensation will have to be paid if the property is sold following a separation.
If the property belongs to both spouses, they must agree on its future use (sale, rental, payment to one partner, etc.).
In most cases, the joint property is sold because one partner cannot afford to finance and maintain the property on their own or because it is too large for one person. If they can service the loan with their salary, they can take over the property as the sole owner and pay out their ex-spouse. Then you'll need to work out with the bank that the other partner is released from the loan agreement. The bank will only agree to this if they can see from proof of income that the spouse can pay off the loan on their own.
Tax aspects must also be considered. If the couple has only lived in the shared apartment or house for a few years, capital gains tax may be payable on the sale of the property. If the property was occupied by both partners for at least the two years prior to the year of sale, this tax does not apply (Section 23 of the German Income Tax Act (EStG)). However, if the couple separated during this period because one partner moved out and the other lived in the property alone or with the children, capital gains tax may be levied on the sale.
Are you going through a divorce and don't know what to do with your property? Contact us now. We will be happy to advise you.